"CHINA IS NOW WORLD'S SECOND LARGEST ECONOMY"

China has overtaken Japan to become the world’s second-largest economy, the fruit of three decades of rapid growth that has lifted hundreds of millions of people out of poverty.

Depending on how fast its exchange rate rises, China is on course to overtake the United States and vault into the No.1 spot sometime around 2025, according to projections by the World Bank, Goldman Sachs and others. China came close to surpassing Japan in 2009 and the disclosure by a senior official that it had now done so comes as no surprise. Indeed, Yi Gang, China’s chief currency regulator, mentioned the milestone in passing in remarks published on Friday.

China, in fact, is now already the world’s second-largest economy.

Cruising past Japan might give China bragging rights, but its per-capita income of about $3,800 a year is a fraction of Japan’s or America’s. China is still a developing country, and we should be wise enough to know ourselves. This will probably bring on the seculators that the yuan is to become an international currency.

Can It Be Sustained?

China’s economy expanded 11.1 percent in the first half of 2010, from a year earlier, and is likely to log growth of more than 9 percent for the whole year, according to Yi. China has averaged more than 9.5 percent growth annually since it embarked on market reforms in 1978. But that pace was bound to slow over time as a matter of arithmetic, Yi said. If China could chalk up growth this decade of 7-8 percent annually, that would still be a strong performance. The issue was whether the pace could be sustained, Yi said, not least because of the environmental constraints China faces.

In an assessment disputed by Beijing, the International Energy Agency said last week that China had surpassed the United States as the world’s largest energy user. If China can keep up a clip of 5-6 percent a year in the 2020s, it will have maintained rapid growth for 50 years, which Yi said would be unprecedented in human history. The uninterrupted economic ascent, which saw China overtake Britain and France in 2005 and then Germany in 2007, is gradually translating into clout on the world stage.

China is a leading member of the Group of 20 rich and emerging nations, which since the 2008 financial crisis has become the world’s premier economic policy-setting forum. In one important respect, however, China is still a shrinking violet: anxious to shield itself from the rough-and-tumble of global markets, it does not permit its currency to be freely exchanged except for purposes of trade and foreign direct investment. And Yi said Beijing had no timetable to make the yuan fully convertible.

“China is very big and its development is unbalanced, which makes this problem much more complicated. It’s difficult to reach a consensus on it,” he said. In the same vein, China was in no rush to turn the yuan into a global currency.

China would stick to the principle of holding its $2.45 trillion of official reserves in a mix of currencies and assets. The stockpile — the world’s largest — was so big that it was impossible to adjust its currency composition in a short space of time: “We won’t be particularly bearish on the dollar at a given time or particularly bearish on the euro at another time.”
SOURCE: WALL STREET GRAND JOURNAL